Case Law Details
DCIT Vs Jay Properties Private Limited (ITAT Mumbai)
ITAT Mumbai held that rental income from giving out commercial properties for compensation as per Memorandum of Association (MOA) is to be treated as ‘business income’ and not as ‘income from house property’.
Facts- The assessee company is engaged in the business of dealing in real estate properties, development, construction, etc and was investing funds in properties directly or indirectly by acquisition of shares or by joint ventures. The assessee company also had earnings from taking on compensation, commercial properties and giving such property for compensation with no profit or loss. The assessee filed its return of income dated 25.09.2012, declaring loss of Rs.22,89,74,129/- and the same was processed u/s. 143(1) of the Act. The assessee’s case was selected for scrutiny and the assessment order dated 3 1.03.2016 was passed u/s. 143(3) where the A.O. determined the total income at Rs.13,53,79,120/- as income from business services under the head ‘income from other sources’ on the ground that the assessee company was not the owner of the properties in which the assessee had alleged to have received the rental income, thereby disallowing the deduction claimed by the assessee u/s. 23(1A) and u/s. 24A of the Act.
The assessee was in appeal before the ld. CIT(A), challenging the assessment. CIT(A) accepted the contention of the assessee that the rental income was to be assessed as ‘income from business’ thereby holding that the same is to be treated as ‘income from business’ for the impugned year. CIT(A) allowed the expenses claimed by the assessee as expenses incurred for earning such income and that the same pertain to business activities and had allowed it u/s. 37(1) of the Act.
Being aggrieved, revenue is in appeal before us.
Conclusion- Held that the assessee is having incidental and ancillary object of renting out of the properties, which are not owned by the assessee company. The decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Limited and Rayala Corporation Private Limited vs. ACIT has allowed the proposition that the impugned income is to be treated as ‘business income’ and not as ‘income from house property’. It is also seen that similar view has been taken in assessee’ s case for AYs. 2009-10 and 2014-15 by the Tribunal and the A.O. for that year. We do not find any adverse reason for deciding the issue otherwise and, therefore, hold that there is no infirmity in the order of the ld. CIT(A) in deciding that the impugned income is to be treated as ‘business income’.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal filed by the Revenue, challenging the order of the learned Commissioner of Income Tax (Appeals) (‘ld.CIT(A) for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2013-14.
2. The Revenue has challenged the following grounds in appeal:
1. Whether on the facts and circumstances of the case, and in of law, the Ld. CIT(A) has erred by treating the rental income of Rs. 13,44,00,000/- held as Income from Other Sources’ to ‘business income, Consequently allowing all the related business expenses incurred.
2. “Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in treating interest income of Rs. 9,78,082/- held as Income from Other Source’ to Business income consequently allowing all the related business expenses incurred.
3. “Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in Allowing expenses of Rs. 15,74,53,030/- by holding that all the expenses are incurred for the business activities carried on by the assessee.
4. “The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored.”
4. The brief facts are that the assessee company is engaged in the business of dealing in real estate properties, development, construction, etc and was investing funds in properties directly or indirectly by acquisition of shares or by joint ventures. The assessee company also had earnings from taking on compensation, commercial properties and giving such property for compensation with no profit or loss. The assessee filed its return of income dated 25.09.2012, declaring loss of Rs.22,89,74,129/- and the same was processed u/s. 143(1) of the Act. The assessee’s case was selected for scrutiny and the assessment order dated 3 1.03.2016 was passed u/s. 143(3) where the A.O. determined the total income at Rs.13,53,79,120/- as income from business services under the head ‘income from other sources’ on the ground that the assessee company was not the owner of the properties in which the assessee had alleged to have received the rental income, thereby disallowing the deduction claimed by the assessee u/s. 23(1A) and u/s. 24A of the act.
4. The assessee was in appeal before the ld. CIT(A), challenging the assessment order.
5. The ld. CIT(A) held that in assessee’s case for A.Ys. 2009-10 and 2014-15, the Assessing Officer (A.O. for short) has accepted the contention of the assessee that the rental income was to be assessed as ‘income from business’ thereby holding that the same is to be treated as ‘income from business’ for the impugned year. The ld. CIT(A) allowed the expenses claimed by the assessee as expenses incurred for earning such income and that the same pertain to business activities and had allowed it u/s. 37(1) of the Act. The Revenue is in appeal before us, challenging the order of the ld. CIT(A) in treating the rental income and interest income as ‘business income’ and consequentially allowing the expenses on the ground that it was expended for the purpose of business.
6. The learned Departmental Representative (ld. DR for short) contended that the impugned income received by the assessee was in the nature of rental income and the same cannot be assessed as ‘business income’. The ld. DR further stated that for A.Y. 2009-10, the matter was set aside to the A.O. for verification and the ld. CIT(A) has erred in relying on the order of the Tribunal in A.Y. 2009-10 in deciding the impugned order. The ld. DR relied on the order of the A.O.
7. The learned Authorised Representative (ld. AR for short) for the assessee, on the other hand, controverted the same and stated that in earlier years in assessee’ s case, the same was treated as ‘income from business’ and not ‘income from other sources’. The ld. AR further stated that the expenses incurred was exclusively for the purpose of business and relied on the decision of the Tribunal in the case of Nisarg Realtors Pvt. Ltd. vs. ACIT [2022] 139 com 163 (Mum)(Trib).
8. We have heard the rival submissions and perused the materials on record. It is observed that the A.O. in the assessment order had determined the rental income, amounting to Rs.13,44,00,000/- and the interest income of Rs.9,78,082/- under the head ‘income from other sources’ and disallowed the expenses amounting to Rs. 15,74,53,030/- u/s. 37(1) of the Act. The assessee submits that the impugned income was received by the assessee as ‘income from business and services’ and that the assessee had offered the same to tax under the head ‘income from house property’, whereas the A.O. had assessed the same under the head ‘income from other sources’ on the ground that the assessee does not own the properties from which the said income was derived, thereby holding that the same is not a business activity. The A.O. disallowed the deductions claimed by the assessee u/s. 23(1)(a) of the Act towards municipal taxes, amounting to Rs.8,76,118/- and u/s.24(a) amounting to Rs.4,00,57,045/- being 30% of the net annual value. The assessee further contended that the A.O. has failed to consider the main object of the assessee company as per the Memorandum of Association (MOA for short) which was to make profits through commercial exploitations of the property and relied on the decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Limited 373 ITR 673 and Rayala Corporation Private Limited vs. ACIT 72 taxmann.com 149. The assessee relied on its own case for A.Y. 2009-10 where the co-ordinate bench had remanded the matter back to the file of the A.O. with a direction to decide the claim of the assessee in view of the decision in Chennai Properties & Investments Limited (supra) by considering the objectives of the MOU. The A.O. in A.Ys. 2009-10 and 2014-15 had assessed the impugned income as ‘business income’ of the assessee.
9. It is also observed that the assessee has received interest income, amounting to Rs.9,78,082/- and had incurred interest expenses amounting to Rs. 12,43,78,968/- which was also treated by the A.O. as ‘income from other sources’ and not ‘business income’. The assessee had submitted that it had made an investment of 11.90% on non convertible debenture of ECRPL and had sold the same and received income amounting to Rs.9,78,082/-. The assessee further stated that clause 15 of the MOA states that it was an ancillary object of the assessee in making investments in securities for a short period and the same does not form part of the business of the assessee and contended that the interest income is ‘business income’ to be taxed under the head ‘business income’. The A.O., on the other hand, has stated that the assessee company had not carried out any business activity during the impugned year as per the objectives of the MOA and receiving loans was not the objective of the assessee company. The A.O. further stated that as per the objective of the MOA, the assessee’ s business activity is not concerned with taking the premises of the compensation and subletting the same with no profit or loss and the A.O. relied on the decision of the co-ordinate bench in the case of BMK Laboratories Pvt. Ltd. vs. DCIT (ITA No. 4443/Mum/2011) which held that on similar facts, the interest income received from such activities is to be assessed under the head ‘income from other sources’ and not as ‘business income’. The A.O. held that since the assessee company was not the owner of the premises, the income derived from the rental receipts cannot be taxed under the head ‘income from house property’ and has to be taxed under the head ‘income from other sources’ as per section 56 of the Act and the related expenses u/s. 57(iii) of the Act which was not expended for the purpose of such business activity and disallowed the same on the said ground. The A.O. disallowed the business expenses amounting to Rs.34,33,34,018/- as not incurred for earning the business income. The ld. CIT(A), on the other hand, held that for A.Ys. 2009-10 and 2014-15, the A.O. has held the impugned income received out of renting the properties was assessed as ‘income from business’ and the Tribunal for A.Y. 2009-10 has held the same to be business income. The ld. CIT(A) further held that the same view has been taken by the A.O. in A.Y. 2014- 15 vide order dated 28.12.2016 and thereby allowed the assessee’s appeal on this ground.
10. From the above observation, it is evident that the assessee company has been engaged in the business of real estate and has been giving commercial properties for compensation as per the objectives of the MOA of the assessee company. It is also observed that the assessee is having incidental and ancillary object of renting out of the properties, which are not owned by the assessee company. The decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Limited (supra) and Rayala Corporation Private Limited vs. ACIT (supra) has allowed the proposition that the impugned income is to be treated as ‘business income’ and not as ‘income from house property’. The assessee has also relied on the decision of the co-ordinate bench of the tribunal in the case of Nisarg Realtors Pvt. Ltd. (supra) which has reiterated the said It is also seen that similar view has been taken in assessee’ s case for AYs. 2009-10 and 2014-15 by the Tribunal and the A.O. for that year. We do not find any adverse reason for deciding the issue otherwise and, therefore, hold that there is no infirmity in the order of the ld. CIT(A) in deciding that the impugned income is to be treated as ‘business income’. Hence, ground nos. 1 & 2 raised by the Revenue are dismissed.
11. Ground no. 3 pertains to the disallowance of expenses amounting to 15,74,53,070/- by treating the same as expenses incurred for the purpose of business activity of the assessee. It is observed that the A.O. has disallowed the impugned expenses on the ground that there was no business income activity carried out by the assessee company, thereby holding that the impugned expenses are not for carrying out the business. The assessee has contended the same to be as ‘business expenses’ and had claimed u/s. 37(1) of the Act. The ld. CIT(A) has allowed the said expenses on the ground that the income from rental activities are already held to be business income and the impugned expenses are held to be incurred for earning of such income. The ld. CIT(A) has allowed the same u/s. 37(1) of the Act. It is observed that the ld. CIT(A) has rightly allowed the expenses to be related to the earning of business income and in this note, we find no infirmity in the order of the ld. CIT(A) in allowing the expenses claimed u/s. 37(1) of the Act. Accordingly, ground no.3 raised by the Revenue is also dismissed.
12. Ground nos. 4 & 5 is of general in nature and requires no adjudication.
13. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 09.02.2 023
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